Everyone who receives an audit notice wants to know what they can do to secure the best possible result. For most taxpayers the “best” result is a minimization of (1) the money owed to the taxing authority, (2) money paid to any consultant, and (3) time devoted to addressing the audit. So what can you do to get the “best” results? ACTIVELY PARTICIPATE IN THE AUDIT PROCESS!!!
So many people throw money at the audit and hope for the best. Don’t do it. Here is how to effectively handle an audit:
1. Decide how you are going to handle the audit as soon as possible.
Are you going to designate staff to interface with the auditor? If so, who? See our white paper on 10 Costly Audit Mistakes to see information on how to handle the audit on your own.
If you are going to hire a consultant, decide when you are going to do so and start identifying candidates. See our blog post “I Hired a State Tax Consultant…And They Just Took My Money” for information on how to choose a consultant.
2. Start gathering documents needed to conduct the audit.
The state taxing authority sends a list of documents they need to conduct an audit. Start compiling the information and be ready to give the auditor access to the data. Be careful to answer the questions and don’t volunteer any “extra” information.
3. Avoid an estimated deficiency at all costs.
Start getting the requested documents ready for review by the auditor as soon as possible . If you don’t have the required documents ready for review, the auditor has the power to estimate a deficiency. Estimates are usually high. If the auditor is forced to do an estimate, the business owner is put in the position of proving the estimate wrong. You can only prove estimates wrong by providing the documents that were requested in the first place. FYI—If you are seen as being unresponsive or obstructive, state taxing authorities will probably not waive penalty. There is no chance, under normal circumstances, that you will receive a waiver of interest.
4. Learn from any mistakes that are identified by the auditor and your consultant, if any.
If an auditor identifies areas of noncompliance, and you agree that there is an issue, fix it immediately! It is common that taxpayers make the same mistakes in subsequent audits.
5. Adhere to all deadlines imposed by the state.
Don’t miss deadlines! Read all correspondence, including letters and emails. There is a cost to missing deadlines! I have never seen an instance in which being non-responsive ever benefitted a taxpayer. NOT EVER. I have seen numerous situations in which being non-responsive cost business owners a lot of money, time, and upset.
If you hire a consultant, it is still your responsibility to make sure that they are submitting responses in a timely manner. Your name is on the bill…not the consultant’s. Stay on top of YOUR audit.
6. Listen to your consultant explain the plan of action.
Have your consultant explain how they plan to address your matter. If someone says “don’t worry… it’s a piece of cake,” RUN! Consultants who have not seen your records or know your business can’t promise a smooth audit. There are just too many variables—at first.
After the audit has started, ask and really listen when your consultant explains what is going on and your options. If their explanations don’t make sense, something may be wrong. Make sure you know the difference between being unhappy with the truth and getting a non-responsive answer to information requests. There is nothing worse than seeing someone spend a lot of money fighting for a losing tax position.
8. Don’t hide the ball from your consultant.
Don’t fail to disclose facts. Your consultant is YOUR advocate. We can’t advocate for you if we don’t know what’s going on. It is not a good situation when a consultant explains something to an auditor and the records tell a different story. Everything becomes suspect. This translates into the business owner spending more money because taxpayer representations are subjected to heightened scrutiny.
Do you want a good audit result? Participate in the audit! Know what is going on with your audit. Take full advantage of and maximize all of your chances to advocate or have someone advocate for you! And fix any areas of noncompliance.